Reading 53: Security-Market Indices LOS c习题精选 evidence, investment, government, 2010

honeycfa

LOS c: State how low correlations between global markets support global investment.

The evidence suggests that the correlation of returns between U.S. government bonds and an index of international government bonds is:

A) between 0.0 and 0.5, and that between indices of U.S. investment grade bonds is close to 1.0.

B) between 0.0 and -0.5, and that between indices of U.S. investment grade bonds is between 0.0 and 0.5.

C) between 0.0 and 0.5, and that between indices of U.S. investment grade bonds is between 0.25 and 0.75.

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The evidence suggests that the correlation of returns between U.S. and non-U.S. government bonds is approximately 0.35, while that between indices of investment grade U.S. bonds is close to 1.0.

honeycfa

The level of diversification benefits available from investing internationally is determined by the:

A) correlations between market returns.

B) relative returns between markets.

C) standard deviations of the returns.

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The principal factor that determines whether or not diversification benefits are available from investing internationally is the correlation of returns. In general, the lower the correlation, the greater the benefits.

honeycfa

The following is a matrix of return correlations for markets A, B, and C.

	A	B	C
A	1.0	0.5	0.4
B		1.0	0.3
C			1.0

Which combination of markets will produce the lowest overall level of portfolio risk, as measured by the standard deviation of portfolio returns?

A) Cannot be determined with information given.

B) A and B.

C) B and C.

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All combinations appear likely to yield diversification benefits. However, while B and C clearly have the lowest correlation between the pairs, we cannot determine which combination will have the lowest overall standard deviation of returns without knowing the standard deviations of the individual markets.